Published 4:00 am, Sunday, January 20, 2002

In the wake of last year's costly electricity and natural gas shortages, California now faces another energy crisis -- this time at the gas pump.

Time is running out on a year-end deadline to remove the additive MTBE from California gasoline, and state officials and energy experts worry that the failure to meet the deadline could result in soaring gas prices.

MTBE, a possible human carcinogen that has been found in many of the state's water supplies, must be replaced with ethanol, another federally mandated gasoline additive, which is processed from corn in the Midwest.

Officials wonder how the state's gasoline refiners will be able to complete tens of millions of dollars in refinery and distribution retrofit projects before the end of the year, including, for example, laying railroad spurs long enough to handle 100-car trains carrying ethanol to the state.

They also question the ability of Midwest producers to provide enough ethanol to meet the state's needs -- and to find a way to deliver it.

He ordered the fuel additive, which makes gasoline burn cleaner, phased out by no later than the end of 2002. Three years later, MTBE is still in use as a clean-air component in the state's reformulated gasoline, and Davis finds himself in a tight political spot.

BEHIND SCHEDULE ON CHANGES

The needed infrastructure and equipment changes to handle up to 950 million gallons of ethanol per year from Midwest farmers are behind schedule. And as each day passes, further delays in the switch to ethanol create a greater risk of supply problems and of price spikes as high as 50 cents a gallon.

Davis is considering several options, according to state officials, including pushing back the MTBE ban.

Any postponement of the deadline, however, could draw attacks from environmental groups and water boards throughout California, which say the state has delayed long enough.

Or he could keep the deadline and risk alienating millions of California motorists and voters, who could be facing higher gas prices as Davis takes his re-election campaign into the final election countdown.

"This is a ticking time bomb," said Bruce Cain, a political scientist at the University of California at Berkeley who saw a number of parallels with last year's energy crisis. Politically, whatever Davis decides could come back to haunt him, Cain explained.

Like the recent energy crisis, much of California's current situation is because of economic and political forces outside the state.

Since Davis issued his MTBE ban in 1999, California has tried repeatedly to free itself from the federal mandate requiring the use of oxygenates such as MTBE or ethanol to reduce dirty tailpipe emissions.

California gas refiners and clean air officials say the state can now produce a gasoline that meets federal clean air standards without any oxygenates.

But the state has run headlong into a powerful bloc of Midwest lobbyists and legislators representing corn farmers and ethanol producers, who have successfully stymied every California effort at changing the federal law.

Last June, the Bush administration turned down the state's 2-year-old request for a waiver from the federal oxygenate requirement, stating there was "uncertainty" that California could meet the clean air standards without an oxygenate.

Davis sued to overturn the decision, but a court decision is unlikely to come soon enough to spare him from the dilemma.

Meanwhile, facing the MTBE phaseout deadline of Dec. 31, California refiners began moving forward with plans to convert to ethanol, a costly process that requires retooling their refineries.

ETHANOL SUPPLY UNCERTAIN

One of the greatest concerns is whether there will be enough ethanol to replace MTBE. Last year, U.S. ethanol production, located almost exclusively in the Midwest, was over 1.8 billion gallons annually. California's need of up to 950 million gallons a year would require a dramatic increase.

After the Bush administration's ruling in June, Midwest farmers and ethanol- producing giants like Archer Daniels Midland, which supplies 40 percent of the U.S. ethanol market, were delirious at the prospect of ramped-up production and the hundreds of millions of dollars that would begin flowing in from California.

Plant expansion and new construction went into overdrive.

However, the Davis administration was concerned that a Midwest ethanol monopoly would drive prices through the roof. Officials also worried about logistics. Freezes in the Midwest, for example, could halt barges bringing ethanol down the Mississippi and through the Panama Canal to the West Coast, periodically restricting the supply flow.

Estimates show that as much as 40 percent of California's ethanol supplies would come by ship and the rest by rail.

In September, California officials toured Midwest ethanol facilities to gauge U.S. production capacity. They also met with officials from the Governors' Ethanol Coalition, headed up by Nebraska Gov. Mike Johanns, to see whether a compromise could be worked out to revive California's chance for a waiver in exchange for supporting a national ethanol requirement.

In California, however, refiners were taking no chances, and they continued the complicated process of preparing for ethanol. Refining changes were necessary to create a new base gasoline stock to blend with ethanol and produce a final product that would meet clean air standards.

But because ethanol must be "splash-blended" with the new gasoline stock when it is loaded on tanker trucks -- not like MTBE, which is added at the refinery -- major infrastructure changes are also needed at distribution terminals, including new truck racks, piping, tanks and railroad spurs, all costing millions of dollars.

In 1999, the California Energy Commission estimated that the modifications would cost $100 million and take two to three years, including the clearances required under environmental regulations.

State officials say there are still too many uncertainties to predict whether the deadline can be met.

He explained that so far, little work has been done on the railroad infrastructure to accommodate the long, 100-unit "ethanol express" trains needed to bring the oxygenate to California.

"They say they'll bring it out (from the Midwest) in trucks if they have to, " he added, "but it would be a whole lot more expensive."

Many refiners also express concerns.

COMPLICATED INFRASTRUCTURE

"California's gasoline infrastructure is incredibly complicated, with so many different pieces that have to come together seamlessly for it to work," said Scott Folwarkow, director of regulatory affairs for independent refiner Valero Energy Corp. "If one part isn't ready, the price impacts can be huge."

Like the Midwest ethanol producers, Folwarkow and other refinery executives insist they will meet the December deadline.

But at what cost?

Originally, the ethanol switch was expected to cost California motorists at least $800 million a year. Any additional costs because of supply problems most likely will be passed through to the consumer.

"That's our big concern," said William L. Rukeyser, spokesman for the California Environmental Protection Agency, noting that the state's gasoline market is so tight that even a small glitch in supply flow could result in a price spike of 50 cents.

Davis has been pondering the options laid out by his administration for four months, and none of them is politically palatable, especially the risk of soaring gas prices if the MTBE ban goes into effect.

The governor's office would not comment on when Davis might make a decision.

"We would be very concerned if the (MTBE phaseout) deadline is extended, considering the damage MTBE is doing to the water quality of this state," said Elisa Lynch of the environmental group Bluewater Network.

The governor has a third option, which is to wait and see whether Congress passes a recent compromise proposal that would allow Davis to waive the oxygenate requirement. He could then ban MTBE and allow refiners to make gas with little or no ethanol.

California officials and the Midwest governors hammered out the broad outline of a compromise when they met last September:

-- California and East Coast states like New York and Maine, which also want to ban MTBE, could waive the oxygenate requirement, freeing them from using MTBE or ethanol.

-- Congress would set a required amount of ethanol that refiners would have to purchase each year. The amount would increase annually for a decade or more,

satisfying the Corn Belt bloc.

-- Tradeable credits would be created so that refiners in the Midwest who purchase more than their required quota of ethanol would get a credit they could trade or sell to coastal refiners.

The compromise was added to the recent energy bill proposed by Senate Majority Leader Tom Daschle, D-S.D., who has scheduled debate on the omnibus energy legislation for next month.